For some investors, maybe most investors, once a week is as much time or interest as they have for investment-research. But I shop the bond-market daily, because that’s my way of keeping up on prices. And even when it becomes obvious that I’m not likely to find anything worth digging into further, I’ll run some scans just to keep in practice. So this is the question I posed to myself:

“Could anything rated as investment-grade be found in today’s market that would offer a real-rate of return after taxes and inflation?”

Assumptions: (1) The ordinary-income from coupon-payments will be taxed at 25%. (2) The capital-gains from buying at a discount to par will be taxed at 15%.(3) The capital-losses from buying at a premium to par will be discounted by 15%. (The loss results in a credit that can be used to reduce the tax that would have to be paid elsewhere in the portfolio on capital-gains.)(4) The inflation-rate over the holding-period will average 5%. (This is higher than the BLS number, but much closer to, if not an under-estimate of, what householders are actually experiencing.)(5) Pro-rata bonds were excluded. (6) Bonds requiring a minimum-purchase of 100 or more were excluded.

As you can see from the left-most column (which is a ‘most-yield-in-least-time’ ranking), very few issuers are offering a real-rate of return. One of them is Genworth, which is now under review for downgrade. Another is SLM, afflicted by news reports of rising student load default-rates. A third is Telefonica Europe, whose 10-bond minimum, long-datedness, and unsettled market environment urge caution. In short, if a bond still rated investment-grade is offering a real-rate of return, you can assume that it isn’t really investment-grade and/or it is only available in institutional sizes.

Constructing such a list isn't a fruitless, because it points toward issuers that might be worthwhile to track while waiting for their prices to fall to more reasonable levels. Also, such a list highlights the interplay between price and coupon over long holding-periods, namely, that 'buying-at-a-premium-to-par' isn't necessarily A Bad Thing. It all depends on what that premium is buying you in terms of your tax-and-inflation-adjusted yield. It's your achieved purchasing-power that matters, not merely the raw price you paid. For sure, I'm as anxious as the next guy or gal to buy as cheaply as possible, and I hate paying premiums. But I also know that the only thing that matters in the game of exchanging present-dollars for futures-dollars is what those future-dollars will buy when stated in present-dollars. Thus, until one runs the math, it cannot be assumed that buying-at-a-premium-to-par is "exchanging elephants for rabbits". It all depends on how the numbers work out in terms of whether purchasing-power is enhanced, preserved, or lost, and modeling those scenarios is simplicity itself in a spreadsheet. Just write the formulas and then 'drop and drag'.

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